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Saturday, April 27, 2013

International Banks Lending to the Middle Class in Asia: Profit vs. Planet

In April 2013, debt levels in Asia were reaching record
levels as international lenders were extending short-term loans to a growing
middle class. Nonmortgage consumer credit in Asia outside of Japan had increased
67% from 2007 to reach $1.66 trillion by the end of 2012. This credit included
credit cards and loans for cars, electronic products, and appliances. Outside
of Japan, Asian car and motorcycle loans nearly doubled from 2007 to 2012, to
reach a record $219.7 billion. Appliance and electronics loans also more than
doubled, reaching a high of $10.9 billion. Meanwhile, credit-card loans grew by
90% to reach a record $234.1 billion, according to Euromonitor. The incentive
for the banks is not difficult to fathom. By 2020, more than half of the
world’s middle class is expected to be in Asia. That translates into more than
100 million more people per year. For the banks, this is an opportunity for
growth that was not possible in the European Union or United States from the
financial crisis of 2008 to at least well into 2013. Lest the debt-loads go to
wherever the banks’ incentives lead, government regulators in China, Malaysia,
and Indonesia began reining in mortgage, credit-card and auto/motorcycle
lending. Interestingly, the European Commission was also working on regulatory
proposals that would limit the incentives of mortgage servicers to produce too
many “bubble-creating” mortgages. Two levels of concerns can be extracted from
this trend in Asia. I contend that the more immediate concerns are crowding out
attention that ought to be paid to the larger but longer-term problems.

One sort of concern posits that the international banks may
have been providing too much credit to people entering the middle class. Such
borrowers, similar to the sub-prime mortgage borrowers in California, Arizona
and Florida, may not be able to handle their new debt-loads. At the beginning
of 2013, debt levels relative to individual income in many Asian economies,
including Malaysia, China, South Korea, Thailand, Indonesia and India, were up
to 30% higher than in the United States. Citigroup’s claim that it was
expanding its lending to the middle class in Asia in a “disciplined manner”
should be considered in light of the financial growth incentives facing the
bank, given the continued weak economies in Europe and North America. The fear
that another debt melt-down might trigger another recession is sufficient to
focus attention on whether the middle-class borrowers can handle their
debt-loads. The baleful consequences that are larger and presumably further off
get pushed aside, given the human mind’s preoccupation with today.

The upsurge in auto loans, for example, points to an
expansive auto market in Asia. Sometime after 2000, the number of cars in use
in China was doubling every year. Meanwhile, the Chinese were building an
“interstate” highway system that would dwarf the network of highways in the
contiguous United States. Loans enabling an exploding middle class to buy cars
increase the global demand for oil, and thus can be expected to result in a
higher price at the pump. Indeed, given the magnitude of the surge in projected
use of fossil fuel in Asia, it may be that the Earth’s reserves of oil will be
fully extracted earlier than expected, perhaps before alternative sources of
energy are sufficient to pick up the slack.

More people=More cars=More pollution source: Businessweek

Furthermore, the increased carbon emissions that we can
expect can be expected to facilitate global warming. To be sure, it can indeed
be argued that the Asian middle class deserves the same freedom and ease
provided by owning a car in the twenty-first century that the American and
European middle-classes enjoyed in the twentieth century. However, the global
climatic threat to the species had not been pressing during the industrial
revolution and the ensuing consumerism of the twentieth century. Even though a
person starting to smoke at 50 can point to a person starting at 20 and say, “I
should be able to have my years of smoking too,” the person who smokes when old
faces more health risks than the person who smokes when young because an older
body is past its prime. Is it worth a heart attack to a 50 year-old to insist
on the right to have five or six years of smoking too?Similarly, the question of more oil for more
cars, as well as more coal-sourced electricity powering electronics and
appliances—all being facilitated by the upsurge in loans—can legitimately be
answered differently when it is feared that the survival of the species itself
hangs in the balance.

As these diverging patterns demonstrate, the threat of over-population is not uniform across the globe. source: fashionzombie.net

Therefore, taking Citigroup at its word that it is lending
in Asia in a “disciplined manner” in spite of the rather unique opportunity for
bank profit there, it can be asked whether international banks have a
responsibility to society, and even the species itself, to help limit the
additional cars put into use in Asia by resisting the temptation to extend more
auto loans to the rising middle class. To such a bank, this might seem like
muzzling the golden goose, particularly given the soft economies in North
America and Europe. Hence, responsibility
involves some voluntary restriction on a company’s financial self-interest.
Duty is not meant to be convenient; otherwise, it would not operate as a tug on
a banker’s conscience.

If corporate social responsibility is not strong
enough—owning the forcefulness of the profit motive and the voluntary nature of
responsibility—then government regulation may have to pick up the slack. But if
industrialization and development is in the interest of the Chinese government,
so as to mollify any potential political resistance from the people, the
question may be whether the U.N. should be given the authority to construct and
enforce international limits on carbon emissions. Put another way, will the
absolutist interpretation of national sovereignty have to be compromised in
order to the species to survive?Problematically, the Chinese government holds that interpretation and so much of the increases in carbon
emissions come from Chinese cities. There is the rub, one might say.

In conclusion, both corporate social responsibility and
government regulation may be insufficient , together or separately, to protect
humanity from the econo-climatic repercussions that must someday catch up with
the massive growth in global population. The spread of capitalistic
industrialization from the developed world to the Asian tigers (i.e., newly
industrializing countries), whose strong governments could concentrate enough
spending on the infrastructure needed for foreign direct investment by multinational
corporations, has allowed the economic and climatic implications of 7 billion
people to catch up.